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Interest rate commentary for 15 May – 19 May 2017

The settings are now no longer set to “risk on”; the switch has been flicked to “risk off” because politics has been stealing the limelight from economic news. Globally, economic news has been on the robust side and even European numbers are starting to look alright but there are still doubts emanating from low inflation figures in most parts of the developed world (U.K. excepted). On the other hand, (U.S.) politics have been unambiguously uninspiring to put it mildly and when the “impeachment” word is thrown around, the political environment is unlikely to improve in the short-term.

Even so, the U.S. Fed’s June meeting is only three weeks away and U.S. cash markets currently place a 3-in-4 chance of a 25bps rate rise. There is a strong correlation between U.S. bond yields and the federal funds rate so U.S. bond yields (and thus Australian bond yields) will face pressures in both directions. However, at least a ratings downgrade won’t be part of the calculations for another year – although there has been some speculation this year will be the last in which the rating agencies will forgive a deviation from the promised land of a balanced budget in four years’ time.


Without the GFC and the all-time low RBA rates which resulted, (some) house investors with mortgages would be in trouble…

chart of the weekhome
Close △Week Week
Cash Rate%   1.50
90day Bank Bill% 1.74  0.00 1.74 1.74
Aust 3y Bond%* 1.77 -0.08 1.86 1.73
Aust 10y Bond%* 2.51 -0.16 2.67 2.47
Aust 20y Bond%* 3.09 -0.15 3.19 3.07
US 2y Bond%   1.27 -0.02  1.30  1.24
US 10y Bond% 2.23 -0.09 2.34 2.22
US 30y Bond% 2.90 -0.08 3.01 2.90
iTraxx 84.5 3.39 84.6 80.6
$1AUD/US¢ 74.58  0.70 74.70 73.85
* Implied yields from June 2017 futures

While there was a host of local economic data to chew on this week, the traders in cash markets managed to either ignore it or decided it all cancelled out and thus Australian cash markets changed very little when compared with last week. Official rate rises are partially factored in for the middle/latter part of 2018 but that is nothing new.

Approved deposited-taking institutions (ADIs) made very few changes to term deposit rates and so readers will not find any surprises, pleasant or otherwise. In any case, check our tables for the best term deposit rates available.

Median trading margins of ASX-listed notes rose on the back of a few securities which are close to maturity while the ASX-listed hybrids sector was largely stable. The security trading last week at a negative yield in the notes sector corrected emphatically this week, as did a couple of other securities and, yes, they are all close to maturity. There is also a larger-than-normal dispersal of securities’ yields in the hybrids sector which is another way of saying there are price anomalies which may be worth exploiting.

There have also been some changes to the peer-to-peer investments on offer this week. Check out our comparison of some of the offerings currently available.

Spreads in the corporate bond market expanded as corporate yields lagged their Commonwealth counterparts. A couple of major banks were busy raising funds in U.S. debt markets while a few non-bank issuers raised a lazy few hundred million at home.

The semi-government bond market was quiet as usual and there were no primary market transactions. Spreads tightened up a little but otherwise it was all quiet on the semis front.

We hope you enjoy reading this week’s YieldReport.

April 2017 monthly interest rate commentary

Bond yields began to fall from the start of the month. Markets were prone to the old “flight-to-safety” theme which arises whenever the US military is let off its leash. On top of this followed the prospect of less-steep official rate rises in the US as tighter monetary policy is partially-instituted by the U.S. Fed. The minutes from the Fed’s March meeting indicated it is planning to reduce its future demand for Treasury bonds via the cessation of re-investment of bonds and RMBS which have matured.

Then came the politics; the possibility of conflict with a nuclearised North Korea and French presidential elections which may lead to the breakup of Euroland. Economic issues such as the likelihood of U.S. tax cuts and .…Click here to read more

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